When U.S. builders set a new record last year by starting 2.1 million homes, no one was happier than Max H. Karl, a neat, bespectacled Milwaukee lawyer. With the upsurge in housing providing the push, Karl's MGIC Investment Corp. put a huge dent in what was once the sole domain of the Federal Government: home loan insurance. Today MGIC (pronounced magic) has $6.5 billion worth of insurance in force, compared with $12 billion insured by the Federal Housing Administration.
That is an especially impressive record considering that Karl, now 61, started only 14 years ago, with $250,000 borrowed from friends, to compete against the Federal Government in a field in which private enterprise had failed dramatically. What MGIC does essentially is guarantee that it will pay any losses a mortgage lender may suffer if the homeowner cannot meet his monthly payments and the house must be foreclosed. After the Depression wiped out poorly financed private insurers, Government agencies, principally the FHA, were the only source of mortgage guaranty insurance, which most bankers and other lenders require on all mortgages carrying less than a 20% down payment.
Cutting Red Tape. The FHA helped spur the first surge of suburb building in the early postwar years. But in the 1950s, savings and loan associations, the chief source of housing credit, began to shun FHA-insured loans because the agency had a rigid ceiling—5% when MGIC started—on the interest that lenders could charge to home buyers. By offering private insurance, Karl enabled S and Ls to obtain higher interest rates on secure loans and still cut the down payment below 20%. Moreover, Karl successfully slashed through the FHA's red tape. MGIC guarantees to approve or reject a home loan insurance application within 24 hours; the FHA takes a minimum of a month because it conducts its own investigation of the home buyer's credit and makes its own appraisal of the value of the house. MGIC investigates not the home buyer but the lender; if Karl is convinced that an S and L's loan procedures are sound, his company only spot checks its appraisal and credit reports.
Stock Surge. That formula has worked so well that since 1966, MGIC's profit after tax has quadrupled, to $16 million, and given the company's stock a rather magical record on Wall Street. Taking into account several stock splits, a MGIC share that sold for 320 in 1956 closed 1971 at $89.25 on the New York Stock Exchange; $43.50 of the rise came last year alone. But building that kind of success was no easy task.
Karl, whose lawyer-like voice cadences belie the missionary spirit of his words, had to spend years evangelizing in order to sell his idea to state legislatures, many of which had passed laws forbidding the private insuring of mortgage loans, and to S and Ls. He proved so persuasive that New York is now the only state that does not license private mortgage insurers like MGIC. Moreover, MGIC has inspired seven other companies to begin selling the same kind of insurance in recent years. In all, the eight companies carry about as much insurance as the FHA. That fact leads Karl to remark: "By 1980, we hope, the FHA will be restricted to insuring housing for the poor."